Indexation

Indexation is a contractual requirement to link the price of a good or service to a general index. The intent behind indexation is to protect a party to a contract from incurring losses when the general price level increases. Indexation is a common feature in labor contracts, as well as in high-inflation countries. For example, the consumer price index increases by 4%, so a union contract stipulates that employee wages in the following year will be increased by 4% to match the inflationary increase; this is a cost of living adjustment.